Money and Banking Questions and Answers

Answer: D

The reserves include all four: All of the above.

India's foreign exchange reserves, held by the RBI, consist of foreign currency assets (the largest part), gold, Special Drawing Rights allocated by the IMF, and the reserve tranche position in the IMF. The RBI reports all four components every week.

Each narrower option leaves out at least one component.

Answer: C

The only correct statement is 4.

The Insolvency and Bankruptcy Board of India, set up under the Insolvency and Bankruptcy Code, 2016, regulates insolvency professionals and processes (4).

Statements 1 and 2 swap the terms. Insolvency is the financial state of being unable to pay debts as they fall due; bankruptcy is the legal process or declaration that follows, in which the debtor's assets are liquidated or reorganised for creditors. Statement 3 also reverses them: insolvency is the state and bankruptcy the legal conclusion.

Answer: B

The discount rate, or bank rate, is the interest rate at which the central bank lends to commercial banks and other depository institutions. By raising or lowering it the RBI makes borrowing from it more or less costly, which feeds into other interest rates and the supply of credit. It is a tool for influencing the credit conditions in the economy, rather than directly stabilising prices, the business cycle or the exchange rate, though it may contribute to them. The answer is option B.

Answer: B

The base rate system was brought in by the Reserve Bank of India on 1 July 2010, replacing the benchmark prime lending rate system, and it set a floor below which banks could not lend to their customers, including on home loans. It was in turn replaced by the marginal cost of funds based lending rate in April 2016. The other years in the options are not the year of introduction. The answer is 2010, option B. The base rate was meant to make loan pricing more transparent, because it applied to all categories of loans.

Answer: D

Demand deposits are deposits that can be withdrawn on demand by the depositor without notice, such as current account deposits and (in the usual classification) savings deposits on demand. Fixed deposits and recurring deposits are time deposits, which are held for a period, and government deposits with the RBI are not part of the demand deposits of banks held by the public. The answer is current account deposits, option D. Because the money can be taken out at any time by cheque or on demand, demand deposits count as part of the narrow money supply.

Answer: A

Equity shareholders are the owners of the company and receive what is left of the profits after all the claims of the creditors and the preference shareholders are paid, so they are called residual owners. Preference shareholders get a fixed dividend, debenture holders are creditors who get interest, and convertible shareholders are not a separate class of owners. The answer is equity shareholders, option A. They bear the greatest risk, as they are paid only after the creditors and the preference shareholders, but they also get the profit that remains.

Answer: C

The functions of money are a medium of exchange, a unit of account, a store of value and a standard of deferred payments. An index of prices is not a function of money, as the price index is measured using money but is not something money does. The answer is index of prices, option C.

Answer: B

The monetisation of the economy is measured by the ratio of the money supply to GDP. The broad measure used for this purpose is M3 (broad money), so the degree of monetisation is the ratio of M3 to GDP, and GDP is the other part of the ratio. M1 is narrow money and M2 is a middle measure. The key gives M2, option B, and I could not confirm this choice independently, so the explanation follows the key. Since the item is worded as a ratio of GDP to a money aggregate, broader aggregates give higher measures of monetisation.

Answer: A

Narrow money (M1) consists of currency (notes and coins) with the public, demand deposits of banks and other deposits with the RBI. Term deposits are time deposits and are included in broad money (M3) and not in M1. The answer is term deposits, option A.

Broad money M3 adds time deposits with banks to M1, which is why term deposits are the item that does not belong in narrow money.

Answer: C

In the classification of the Working Group on Money Supply, the measure that includes the postal savings deposits is M2, which is M1 plus the savings deposits with post office savings banks. M3 adds the time deposits with banks, and L1 and the other liquidity aggregates are broader. The key gives M2, option C. The classification of the Working Group on Money Supply (1977) set out M1, M2, M3 and M4.